Filing Multiple Returns for a Deceased Person in Canada: How Optional Returns Reduce Tax

Most people know that a person who dies partway through the year has a terminal tax return to file — covering income from January 1 to the date of death. What far fewer people know is that Canadian tax law allows an estate trustee to file up to three additional returns for the same person in the year of death, each claiming a full set of personal tax credits.

The ability to file multiple returns for a deceased person is one of the most underused tax-saving strategies in Canadian estate administration. In the right estate, it can reduce the overall tax bill by tens of thousands of dollars.

Why Multiple Returns Exist

Canada's personal income tax system uses graduated rates: the more income you earn, the higher the marginal rate on each additional dollar. Personal tax credits — the basic personal amount, the age amount, the pension income amount, and others — reduce the amount of tax payable.

When everything lands on a single terminal return, large amounts of income get pushed into the highest brackets, and you only get one set of personal credits. Optional returns exist to split certain types of income into separate buckets, each with its own set of credits and each taxed from the bottom of the rate ladder rather than the top.

The Four Possible Returns

1. The Terminal Return (Required)

The terminal return is filed for all income from January 1 to the date of death. It is always required. It is the starting point; the optional returns are additional.

2. The Rights or Things Return (Optional)

"Rights or things" is a specific category of income the deceased had a right to receive but hadn't yet received at the time of death. Common examples include:

• Unpaid salary or wages earned before death but not yet paid
• Accrued interest on certain bonds or deposits that is recognized only when received
• Declared dividends that hadn't yet been paid to the deceased
• Matured but uncashed Canada Savings Bonds
• Outstanding commissions or fees for work already performed

These amounts would normally appear on the terminal return. But if the trustee chooses, they can be separated onto a standalone rights or things return, which uses its own full set of personal tax credits and is taxed from the lowest rate upward.

As of writing, the rights or things return must be filed within one year of the terminal return deadline, or within 90 days of a notice of assessment for the terminal return — confirm current deadlines with the CRA.

When the Rights or Things Return Saves Money

If the terminal return already has significant income (from pension, investment income, or the deemed disposition), adding rights or things income pushes more income into the highest tax brackets. Filing it separately means that income starts at zero in a new return — potentially a dramatically lower effective rate.

3. The Business Income Return (Optional)

If the deceased had an unincorporated business or a partnership interest whose fiscal year ended after January 1 of the year of death but before the date of death, the business income from that fiscal year can be filed on a separate optional return.

This is relevant for farmers, fishers, tradespeople, and other self-employed individuals whose fiscal year doesn't align with the calendar year.

4. Income from a Qualifying Trust (Optional)

If the deceased was a beneficiary of a qualifying testamentary trust or an employee benefit trust, and that trust's income would otherwise appear on the terminal return, it can be reported on a fourth separate return.

This option is less commonly used but can be valuable in multi-generational family structures involving long-running testamentary trusts.

The Key Advantage: Multiple Sets of Personal Credits

Each optional return gets its own full set of personal credits. The most significant are:

• Basic personal amount — the amount of income every Canadian can earn federally and provincially tax-free
• Age amount — for individuals 65 and over
• Pension income amount — for eligible pension income
• Disability amount — if applicable
• Spousal/common-law partner amount — if applicable

Because each return is treated independently, the same credit is claimed on each. The more optional returns filed, the more credits claimed in total — and the lower the aggregate tax bill.

Illustrative Example

Suppose the deceased's terminal return shows $180,000 of income (pension, deemed disposition gains). Adding $40,000 of rights or things (unpaid salary and accrued bond interest) to the terminal return pushes more income to the top bracket.

Filed separately on a rights or things return, that $40,000 starts at the bottom of the tax ladder and receives its own basic personal credit — saving a meaningful amount in tax. The exact savings depend on the amounts and marginal rates — calculate with an accountant.

Practical Steps for Estate Trustees

1. Identify rights or things items early — talk to the deceased's employer, financial institutions, and investment advisor to find accrued amounts outstanding at death.
2. Gather documentation — pay stubs, bond certificates, dividend records, commission statements.
3. Consult an accountant to determine whether filing optional returns makes financial sense given the particular income profile.
4. Meet the deadlines — optional returns have their own filing deadlines tied to the terminal return deadline.
5. Coordinate with the rights or things transfer — if rights or things property is left to a specific beneficiary, there are rules about how the income is attributed.

Transfers of Rights or Things to Beneficiaries

There is an additional planning option: instead of reporting rights or things on a separate return for the estate, the trustee can transfer the rights or things property to a beneficiary who then reports the income. If the beneficiary is in a lower tax bracket, this can reduce the total tax paid across the estate and beneficiaries combined.

The transfer must happen within the same filing window as the rights or things return, and not all rights or things can be transferred (e.g., amounts that are personal in nature).

Frequently asked questions